Rupee should stabilise once U.S. reduces speed of its rate increases: Economics Nobel winner

Douglas W. Diamond, who had collaborated with former RBI Governor Raghuram Rajan on the theory of banking in 2001, says one of their conclusions was that banks need to be a bit fragile to discipline them

Douglas W. Diamond, winner of this year's Nobel Memorial Prize in Economic Sciences, says it is difficult to predict exchange rates but the rupee should stabilise once the U.S. "reduces the speed of its rate increases".

In an email interview to PTI, the American economist also said that when the U.S. raises exchange rates unexpectedly, the dollar tends to appreciate and things will normalise when interest rates are closer to each other in the U.S. and India.

Mr. Diamond, a Merton H Miller Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business, shared the Nobel Prize with former U.S. Federal Reserve Chair Ben Bernanke and U.S.-based economist Philip H. Dybvig for their research into the fallout from bank failures.

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According to the Nobel panel at the Royal Swedish Academy of Sciences in Stockholm, their research has shown "why avoiding bank collapses is vital".

Asked about the continuous fall of the Indian rupee against the U.S. dollar, Mr. Diamond says, "It is difficult to predict the exchange rates. When the U.S. raises rates unexpectedly, the dollar tends to appreciate. Once the U.S. reduces the speed of its rate increases, the rupee should stabilise." On Friday, the rupee appreciated 16 paise to 81.54 against the U.S. dollar.

Mr. Diamond, who had once observed that delegated monitoring allows savers to get access to safe and high returns, says bank monitoring works well when banks are well capitalised and there is little lending to bank insiders.